Saturday, 6 August 2011

Stock picking matters

On the Gold Miner Pulse page a graph is shown where the performance disparity is illustrated among the gold and silver miners of the GMP database. Some lucky picks have been outperforming silver or gold by an impressive margin. Few laggards have lost considerably despite the gold and silver bull market; moreover a disappointing majority of 63 precious metal miners are in the red over nearly nine months.

Little individual information can be conveyed in one such graph. Therefore, I 'm going into detail to give an idea which miners were good picks and what are the investor's nightmares. Overall miners have been largely underperforming the precious metals during most of the period observed. If I were to declare nine months ago that we would have $1660 gold by August 2011 (up about 25%) yet face miners losing over 10%, people whould have been asking: "Don't you know a better joke?". Unfortunately that's how things turned out.

There are 102 miners in the Canadian Gold and Silver Mining database: 78 gold miners and 34 silver miners, with a few dual producers listed both on the gold and silver lists. I have sorted the miners according to performance (since Nov 19 - the inception of the GMP miners indices) and divided the list into quintiles: four times 20 miners and a top quintile of 22 miners. Below you find the five graphs:

Investor's nightmares: (click to enlarge - Symbols used are the TSX quotes)
An investor having a disproportionate capital allocation to miners in this quintile, should probably give up investing in individual stocks. As a lousy stock picker, you're certainly better off with any of the miner ETF's and - considering miner underperformance - even better with bullion or bullion ETF's. It's not that these stocks are necessarily all-time laggards: some used to have an excellent track record, others are the turnaround stories of 2010 and investors still owning them missed a lifetime opportunity to realize profits: think of Novagold or Great Basin Gold. At the top of the graph we find one "major": AEM.

Click to enlarge - Symbols used are the TSX quotes
The laggards on our list lost between 16.5% and 29.5% over nearly nine months. What was observed for the investor's nightmares counts to a lesser degree also for the laggards/underperformers. We find a few major silver miners in this list: Pan American Silver and Silvercorp used to have a decent track record. Silvermex (top of the graph) was one of the best performers last autumn. Considering an over 60% rise of the silver price over the last 9 months (despite the early May sell off), finding major silver miners in this laggards quintile is very disappointing

The midrange
Click to enlarge - Symbols used are the TSX quotes
Owning miners in the midrange quintile is nothing to be ashamed of. Unfortunately market conditions have been so harsh that, even in spite of rising precious metal prices, all miners in this range are a a loss as compared to last November. There are plenty of major miners in this range: Barrick, Hecla and Kinross. The quintile is topped by MAG silver, one of the more promising silver resource developers.

The subtop 
Click to enlarge - Symbols used are the TSX quotes
If your major positions are in this range, you're probably an above average stock picker. Despite this, the bottom section in this graph still lists a few miners having incurred a loss over the period observed. There are  a few of the better majors in this range: Yamana, turn-around story Coeur d'Alène, Silver Standard, Eldorado Gold and Goldcorp. The quintile is topped by Silver Crest Mines at a tie with Revett Minerals.

The top league (22 miners)
Click to enlarge - Symbols used are the TSX quotes
Having chosen miners among these has been the only possibility to outperform precious metals. And yet, being up there is no guarantee for the future. First Majestic Silver and Endeavour Silver are probably the widest known miners in this top segment. Most others are explorers, developers and junior miners. With a large allocation to these miners in your portfolio, you're among the elite stock pickers.

Later updates with the same or a similar approach

No comments:

Post a Comment